Ludicrous as it may seem the possibility of a Eurozone break-up has risen sharply. Italian yields at 8% and Spanish yields at levels not far behind are quite simply unsustainable. The good news this Sunday evening is that at last the ruling elites in both Berlin and Paris seem to have woken up to how close to chaos we are.
The story going the rounds tonight is that after a series of intra-government meeting overs the weekend President Sarkozy will give a major speech ahead of the next EU summit on December 9th in which he will spell out direct and readily implementable steps to save the €. This will involve support for southern tier bond markets ( overdue ), access to a €580 bn IMF standby line and accelerated fiscal union within the 17.
The markets between now and December 9th can be expected to be turbulent with widespread selling of euro area assets by Asian and North American institutions . The new Belgian government ( also overdue ) is expected to announce a package of cuts totalling €15 bn by the end of next week while pressure is being exerted on Italys PM, Mario Monti , to start spelling out what steps he plans to take. A €20 bn austerity package is the minimum required from Italy.
A Franco-British summit on Friday will pave the way for treaty changes to allow the 17 Euro zone members to forge head .France can be expected to give ground on the proposed Tobin finacial transactions tax in return for promises that Britain will not be obstructive to the treaty changes required for fiscal union and the de facto development of a new inner tier .
Intraday volatility over the next two weeks may be extreme . Are this weekends signals rumour or reality ? If action doesn't follow along by the time of the EU summit then the markets reaction is likely to be brutal. The soluble is close to becoming insoluble .